CAP: history & future
Niek Koning
Wageningen University, Netherlands
Why regulate agricultural markets?
• Price volatility
Discourages investment
– Inelastic demand (small supply fluctuations have large price effects)
– Supply fluctuations are unavoidable (wheather, but also ‘cobweb cycles’)
– Speculation
• Recurrent oversupply
– Fossil Fuel Revolution opened vast room for expanding food production
– Lack of market power  competition forced farmers to overuse this room
• Risk of future scarcity
Makes timely investment needed
for soft landing
– Depletion of land, water, P & room for breeding higher yielding varieties
– Rising fossil fuel prices will make fertilizer expensive
– Rising fossil fuel prices will boost demand for biofuels/materials
Initial CAP
• Price support
– All founding countries already supported their farmers
– Common price support should help ensure parity incomes
– Instruments:
• Tariffs, intervention storage & export subsidies (grain, milk, beef)
• Price quotas (sugar)
• Gradual increase in structural policies
– Eased integration of new countries
1980s: struggles about costs of dumping
• Lack of supply management  growing surpluses
• Costs of surplus dumping  budgetary crisis
• Struggles about solutions
–
–
–
–
Arable interests: “close Rotterdam loophole”
Many agro-industries: “lower price support”
Many farmers: “better use supply management”
Economists: “stop market intervention”
• Outcomes:
– Milk: supply management  effective reduction of dumping
– Grain: cutting on price support  dumping cheaper per ton but surpluses
continued to grow
Expenses EU price policy
1980s: struggles about costs
• Lack of supply management  growing surpluses
• Costs of surplus dumping  budgetary crisis
• Struggles about solutions
–
–
–
–
Arable interests: “close Rotterdam loophole”
Many agro-industries: “lower price support”
Many farmers: “better use supply management”
Economists: “stop market intervention”
• Outcomes:
– Milk: supply management  effective reduction of dumping
– Grain: cutting on price support  dumping cheaper per ton but surpluses
continued to grow
1990s: Uruguay Round
• EU-US trade ‘war’
– US dumping oil/protein products through Rotterdam loophole
– EU dumping grain while free riding on US acreage reduction program
• Direct payments game
Thus they could scrub round GATT article XVI which
bound export support to supply management
– EU & US agreed that price support should be reduced worldwide while
exempting direct payments (Blair House Agreement)
• By direct payments they could continue exporting below their cost of production
• Hope that global reduction in price support would create new export opportunities
– This bilateral agreement was forced through the Uruguay Round and became
the ‘Agreement on Agriculture’
– In the EU, its implementation was sold as a social/green policy
Slow implementation of ‘cross-compliance’ and
‘modulation’ showed this to be a political expedient
2000s: dismantling the CAP
• Proponents of dismantling
– Neoliberal politicians
– Agribusinesses dreaming of exports to Asia
• “Locking in the reforms” game
– Remaining production controls are being dismantled
– So support becomes fully dependent on export subsidies or direct payments
• Export subsidies are being banned in the WTO, so only direct payments are left
– Direct payments are more expensive than price support
– Post-2013 budget will be meagre while competing claims will increase
• West European farmers wanting payments to uphold their incomes
• East European farmers wanting their share of payments
• Citizens demanding fulfilment of social/green promises  more to 2nd pillar
– So cutting down the CAP becomes “unavoidable”
20,000
16,000
Million Euro
2000s: dismantling the CAP
12,000
Direct payments
(EU-10)
8,000
Processing subsidies
• Proponents ofIntervention
dismantling
4,000
Export subsidies
0
–
Neoliberal politicians
1980
1985
1990
1995
2000
2005
– Agribusinesses
dreaming
of expanding
exports
to Asia
Lapperre & Silvis 2008
• “Locking in the reforms” game
– Remaining production controls are being dismantled
– So support becomes fully dependent on export subsidies or direct payments
• Export subsidies are being banned in the WTO, so only direct payments are left
– Direct payments are more expensive than price support
– Post-2013 budget will be meagre while competing claims will increase
• West European farmers wanting payments to uphold their incomes
• East European farmers wanting their share of payments
• Citizens demanding fulfilment of social/green promises  more to 2nd pillar
– So cutting down the CAP becomes “unavoidable”
Effects of reform
Short term:
•
increased price volatility
–
–
–
Ending of US acreage reduction program exacerbated decline in grain prices after 1996
Emptying of public buffer stocks exacerbated global food price spike in 2008
Quota phase out exacerbated subsequent fall in milk prices
Milk price projection European Commission
(‘soft landing scenario’, EU price 2003-4 = 100)
EU prices
World prices
Effects of reform
Short term:
•
increased price volatility
–
–
–
Ending of US acreage reduction program exacerbated decline in grain prices after 1996
Emptying of public buffer stocks exacerbated global food price spike in 2008
Quota phase out exacerbated subsequent fall in milk prices
Real milk price evolution
(LTO/Gould)
EU prices
World prices
Effects of reform
Short term:
•
NB: Will Europe dodge its global
responsability? (It has 0.36 ha of
agriculturally suitable land, against
the rest of the world 0.26 ha)
increased price volatility
–
–
–
Ending of US acreage reduction program exacerbated decline in grain prices after 1996
Emptying of public buffer stocks exacerbated global food price spike in 2008
Quota phase out exacerbated subsequent fall in milk prices
Long term:
•
Favoured regions will see a new round of scale enlargement
•
Elsewhere agriculture will stagnate
•
EU will contribute little to avoiding global scarcity in the future
–
•
Increased price volatility, cutting down price support and decreasing direct payments
discourage investment
Few farmers will invest in sustainable production methods
Ineffective remedies
• Safety nets
– Only defend a very low price floor
• Income insurance
– Requires heavy subsidization
– Amounts to subsidized dumping (smart countervailing payments)
• Futures markets
– Reduce short-term price risk, but not price volatility
• Contracts & collective bargaining
– Little effect on grain/beef/milk prices without supply management
Other options open to the EU
Short term:
•
Make prices remunerative for reasonably efficient farmers
−
•
WTO rules leave
enough room for this
Return to tariff protection and supply management
Use direct payments only for less favoured regions & green services
– Budget costs will strongly decrease
•
Ensure sustainability by minimum norms rather than cross-compliance
Longer term:
•
Negotiate closure of Rotterdam loophole
•
Work for multilateral arrangements that stabilize prices
– Buffer stocks managed by supra-national organization
– Use trade quotas on high/middle-income countries when stocks overflow
– Restrict agricultural biomass for non-foods when stocks are depleted
It’s all a question of
political will…
Thanks for your attention